EY: Eurozone bank lending growth is forecast to fall this year and next, as rising interest rates drive a drop in loan demand

Growth in bank lending across the eurozone is forecast to slow from a 14-year peak in 2022 (of 5 percent) and record modest gains of 2.1 percent in 2023 and 1.7 percent in 2024, as demand for loans across the region drops, according to the latest EY European Bank Lending Economic Forecast.

The eurozone officially entered a recession in Q1 2023 and, while the downturn is expected to be very shallow and short-lived, European markets continue to face high inflation and an unprecedented rise in interest rates. As a result, lending volumes are expected to be challenged by a fall in loan demand, at least for the next two years.

Germany – the largest eurozone economy – is forecast to record the sharpest slowdown in net lending growth this year (from 6.9 percent in 2022 to 2.8 percent in 2023), principally due to weak GDP growth and the impact of rising interest rates on a rapidly weakening housing market. While forecast to record a more modest slowdown in growth, Spanish bank lending is expected to contract -1.2 percent in 2023, not helped by a weak start to this year, before returning to 1.2 percent growth in 2024.

Looking beyond the next two years, despite significant market volatility in the European (and wider) banking sector and geopolitical uncertainty, total eurozone lending is forecast to grow 3.3 percent in 2025, and a further 3.9 percent in 2026. This growth will be driven by the impact of last year’s global energy price shock fading, and by expected rate cuts by the European Central Bank in 2024 which should boost spending, support consumer and business confidence and increase the demand for loans.

Omar Ali, EY EMEIA Financial Services Managing Partner, comments: “Although the eurozone entered a technical recession earlier this year and interest rates continue to rise, a fall in energy prices means Europe’s economic outlook is better than many expected it would be a few months back, and bank lending is set to remain in positive territory. However, as households and businesses across Europe continue to contend with high inflation, and with uncertainty prevailing as the war in Ukraine continues, it is understandable that the demand to borrow – for businesses to invest or consumers to buy a house, go on holiday, or buy big ticket items – is slowing from its recent peak.

“A fall in loan demand has a direct impact on lenders, but, collectively, Europe’s banks have built up a robust capital position over the past decade and a half and remain resilient. Ongoing market volatility and challenging geopolitics will however, test resilience this year and next, and Europe’s banking sector will continue to operate with cautious optimism.”